Accentuate the positive

June 7, 2013

When Chinese President Xi Jinping meets President Obama tomorrow at Sunnylands, California, the agenda will likely be populated with the same issues that have dogged the relationship for years – currency values, North Korea, protection of intellectual property, human rights – and some newer ones that have heated up recently, such as cyber-security and conflict in the South China Sea.

This will all be discussed in the context of China’s historic rise and the seeming inevitability of China eclipsing the US economy

sometime in the next decade – something that no power has managed to do since the US became the world’s largest economy in the 1880s.

History teaches us this can be dangerous. When emerging power confronts established power, there is potential for conflict, whether actual war or, as in the case of the Soviet Union’s challenge to the US, for proxy wars and a long, expensive and ultimately draining Cold War.

Both China and the US know how important it is to avoid this so-called Thucydides Trap. They can minimize that possibility by increasing their already significant economic interdependence, which creates powerful incentives to resolve any conflicts and distinguishes the US-China relationship from other historical power contests.

But they also need a new and more positive interdependence. That would create what President Xi has called “a new type of great power relationship”.

We need to come up with a new framework that better aligns China’s need to invest its massive reserves – US$3.3 trillion and rising – and America’s need for infrastructure renewal. China already invests in the US, in the form of 8% or so (and falling) of outstanding government debt. But China doesn’t believe the US-dominated financial system provides adequate protection against potential losses on these reserves, so it is looking to invest in US-based hard assets as well.

US infrastructure satisfies this objective and is a sufficiently large and needy target. Some estimates put the US infrastructure deficit as high as $3 trillion. It is difficult to imagine America’s continued prosperity if this is not addressed.

China’s foreign direct investment may exceed $1 trillion over the next seven years. Last year, China deployed more of this capital in Australia, the 12th largest economy, than in the US, the largest.

We are losing out on this historic opportunity to restart America’s growth and maintain our status in the world because of reflexive fears that permeate our relationship with China. It has prevented us from working out a rational non-controlling architecture for foreign investment in our infrastructure as large parts of the rest of the world have done.

If we can accomplish this, we can entice the new power to invest in the established power, harness the remarkable energy of China into cooperation not conflict, and finally replace the mutual mistrust with goodwill. Rising Chinese strength can be leveraged to sustain established American strength.

The Obama-Xi summit, no matter how optically pleasing, cannot be expected to change US public opinion enough to pave the way to open up the floodgates of Chinese investment here. Nor should the Chinese rely on the billions that they have reportedly spent on slick Madison Avenue campaigns to soften US opinion towards China.

Rather, the Chinese should realize that this can’t happen without changing the political incentives of our leaders here. That requires the Chinese to be bolder about their commitment to America.

If the Chinese now announced that they intend to invest say a minimum of $100 billion per year for the next five years in US infrastructure, they would create a flurry of US state-level proposals, rather than the trickle that exists today.

The greater competition for those dollars – in effect a beauty contest between the states – would transform the political calculus of local leaders. Chinese investment would become a vehicle for improving the lives of their constituents rather than something to be feared.

This state-led initiative could open the way for a much freer flow of investment into the country. The federal government would surely follow the lead set by the states.

Notwithstanding the chorus of China watchers channeling a Nixon-meets-Mao moment – and there is at least some possibility of a breakthrough on North Korea – the real shift in the long-term relationship between China and the US is more likely to happen between Beijing and the states. President Obama and President Xi should create the framework for that to happen.

Bill Mundell (www.billmundell.net) is a member of the advisory board of the Annenberg-Dreier Commission at Sunnylands.

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